Opinionista Ivo Vegter 21 June 2016

A creaking economy can’t afford carbon tax

Conflicting projections have been made about the potential impact of a carbon tax on the economy. Since a tax always redirects resources from where they would otherwise be spent, the only prudent expectation is that it will come at a substantial cost, for dubious benefits. Like South Africa can afford that.

It is a little baffling why a struggling, middle-income country would devote so much of its energy (no pun intended) to trying to make a small dent in what amounts to less than one hundredth of the world’s carbon emissions. If you’re a rich country with a guilt complex about global warming, it might make political sense to establish elaborate carbon trading or carbon tax schemes – even if the practical outcomes are never what was promised and benefit only government bureaucrats and green special interests. But unless you’re rich in South Africa, you’ll agree that in unemployment, poverty, education and healthcare, this country has bigger fish to fry.

The theory behind a carbon tax seems simple. If you want people to smoke less, you tax cigarettes to make them more expensive. Simple market forces will do the rest. This is true for any activity. If you want more of it, subsidise it, and if you want less of it, tax it. (This raises the question of why we tax income, of course, but let’s leave that argument for another day.)

If climate change is a crisis that requires urgent reductions in carbon dioxide emissions – a proposition that we’ll accept here for argument’s sake – then putting a price on such emissions should, in principle, cause companies to produce less of them. The mechanics of this process are rather more complicated, however, and in practice, such a policy ignores a the key economic principle of price inelasticity.

The Carbon Report, a division of sustainableIT that stands to benefit from more complex carbon emissions rules, has a diagram that it hopes makes carbon taxes easier to understand. Mining and energy companies will be taxed. They will pass the tax on to manufacturers, food producers, construction companies and utilities, who themselves will be taxed. They, too, will pass the tax on, in this case to retailers, other manufacturers, services companies, banks and small businesses, all of whose costs will increase. They will pass those costs on to the consumer. In return, the consumer will – it is hoped – modify their consumption habits. The change in demand will prompt innovation and efficiency among retailers and producers, ultimately forcing cleaner technologies upon the mining and energy sector.

That’s the theory. In practice, however, the belief that consumers will change their habits is just an assumption. In many cases, consumers don’t have that luxury. Very few people can afford electric vehicles, for example, yet everyone has to pay an extra tax on fuel. For poor people, who spend a substantial part of their income on transport, this will be a tremendous blow. The complex relationship in The Carbon Report’s diagram suggests the intended outcome at one end of the economy might not be as simple as pulling a lever at the other.

Even if there is some change in carbon emissions, this will come at a high price. Besides, for a regressive tax that hits the poor the hardest and will raise costs throughout the economy, it will involve something called carbon offsets. These are specific activities that supposedly mitigate carbon emissions, such as tree planting, energy efficiency projects, land restoration, biodiversity protection and rural development. (Why rural development is on that list, only a politician can tell you.) This sort of expenditure, which companies otherwise would not make, diverts economic resources away from their most efficient use, and hands it to special interests that would otherwise not be receiving such capital. By definition, such capital re-allocation makes an economy poorer. Sure, men in suits with seductive sales pitches for “green” solutions and consultancy will benefit, but they do so at the cost of everyone else.

Research by a US consultancy, Applied Development Research Solutions, found that a carbon tax “could” spur GDP growth, provided that the revenue is reinvested in green projects. However, the national Treasury intends to do no such thing. The carbon tax will be, according to the Carbon Tax Bill, “ for the benefit of the National Revenue Fund”. It will not be ring-fenced for any special purpose.

Nor will South Africa follow the example of perhaps the only successful carbon tax in the world, in the Canadian province of British Columbia, and return the tax to the people in the form of tax cuts for companies and individuals to make it revenue neutral. The British Columbia government did so to reassure the people that its policy intent was genuine and the new tax was not simply a revenue grab or a sop to special interests.

The Applied Development Research Solutions report said that in the absence of what it calls “support measures”, the impact of a carbon tax in South Africa would be negative, to households, investment and GDP growth alike. Annual GDP growth would be 0.7% lower per year, every year. At -1.2%, the economy contracted much faster than the -0.1% economists expected in the first quarter of 2016, after the report came out, so its estimate was probably optimistic. It seems unwise to sacrifice 0.7% or more of our annual growth when we’re facing a possible recession and economic expansion is the only way in which we can ever hope to address poverty and unemployment on a meaningful scale.

Besides putting the kibosh on GDP growth, a carbon tax would also affect investment and household income negatively. It will cause a decline in investment in the mining and agriculture sectors, which are the reason the economy contracted in the first place.

The Organisation Undoing Tax Abuse, which recently changed its name and widened its focus beyond opposition to urban tolling, has waded into the debate with a statement in which it says a carbon tax will be an unnecessary burden to the South African economy. It points out that since Eskom’s steep tariff hikes already place a high price on electricity, companies and consumers are already doing all they can to limit their use of energy. After a certain point, the demand for energy becomes price inelastic, because it is an absolutely necessary input for any economic activity and every household.

As a result, adding a new tax to the fiscus, which will require a new layer of costly bureaucracy to implement the necessary accounting and reporting, will not achieve what it describes as “the government’s stated and noble intention” of reducing greenhouse gas emissions.

There is a reason carbon pricing was not a part of the recent Paris Climate Change Agreement. After the failure of the European carbon trading scheme, and in light of the negative outlook for the global economy, few countries have the appetite for policies that will have uncertain impact but impose substantial costs and structural changes on their economies.

Why South Africa should be risking its economy to lead the global charge to tax carbon, when the economy is already creaking under the burden of negative growth and heavy regulation, is a mystery. Until you realise that the billions a carbon tax will drain from the economy will fill the coffers of the taxman, and the bank accounts of green interests and crony capitalists of all shades. DM


Corruption, Inc

Thulas Nxesi: State Capture forces resist the clean up at Public Works

By Marianne Merten


Inequality in South Africa: Beyond the 1%

Fazila Farouk and Murray Leibbrandt 16 hours ago

Riding a Black Unicorn Down the Side of an Erupting Volcano While Drinking from a Chalice Filled with the Laughter of Small Children is the title of a dark cabaret album by 'Voltaire'